Factory activity strengthening; construction down

In this Jan. 25, 2010 photo, Glenn Hanson stitches together the four panels of a football at the Wilson Sporting Goods football factory in Ada, Ohio. The Institute for Supply Management said Monday, Feb. 1, 2 the manufacturing index expanded in Jan. for 6th straight month, to highest point since 2004. (AP Photo/Amy Sancetta)
— AP

In this Jan. 25, 2010 photo, Glenn Hanson stitches together the four panels of a football at the Wilson Sporting Goods football factory in Ada, Ohio. The Institute for Supply Management said Monday, Feb. 1, 2 the manufacturing index expanded in Jan. for 6th straight month, to highest point since 2004. (AP Photo/Amy Sancetta)
/ AP

NEW YORK 
Hopes that America's factories will help drive the economic recovery drew support Monday from news that manufacturing activity grew for a sixth straight month in January, to its strongest point since 2004.

Other reports offered a reminder that the recovery lacks strength. Construction spending dropped sharply in December to its lowest level in more than six years. And gains in personal income and spending were too modest in December to signal that consumers can fuel a strong rebound.

Manufacturing activity has become a pocket of strength for the economy, though some of it flows from temporary factors such as customers needing to add to depleted stockpiles of goods.

The Institute for Supply Management said its manufacturing index read 58.4 in January, compared with 54.9 in December. Analysts polled by Thomson Reuters had expected a level of 55.5. A reading above 50 indicates growth.

New orders, a sign of future growth, jumped to 65.9 in January, the highest level since 2004, from 64.8 in December. Current production surged to 66.2 from 59.7, also to its peak since 2004. Order backlogs grew.

Thirteen of 18 industries said they were expanding, led by the apparel, textile mills and machinery sectors.

Manufacturers have been pumping up production to feed their customers' depleted stockpiles. The ISM said manufacturers' inventories contracted at a slower rate in January, but their customers' stockpiles fell to an all-time low.

As their customers try to restock their shelves, manufacturers need to ramp up production to match their demands. That could mean hiring more workers, which would help invigorate the economic rebound. ISM's employment measure grew last month.

Meanwhile, a weak dollar is boosting exports to fast-growing countries in Asia and Latin America. Monday's report said exports grew more quickly in January, to 58.5 from 54.5 in December.

Economists warn, though, that high unemployment and tight credit for small businesses could make the inventory bounce short-lived.

The Commerce Department report on construction spending said home building fell by the steepest amount in seven months, evidence that housing remains a weak spot in the economy. Spending on new homes, office buildings and highways fell 1.2 percent to a seasonally adjusted annual rate of $902.5 billion, the lowest since August 2003. That was much worse than analysts' expectations of a 0.5 percent drop.

November's figures were revised down to also show a 1.2 percent decline, below the 0.6 percent drop initially reported.

Construction spending on new homes and apartments fell 2.8 percent, the worst downturn since May 2009. Spending on new office buildings and other commercial projects rose by 0.2 percent after falling for seven straight months. That's a surprise, given the difficulty many commercial developers have had in obtaining credit.

Housing starts fell 4 percent in December, the government said earlier this month, held back by unusually cold weather. But building permits, an indication of future activity, rose sharply, a sign that activity could rebound in January.

Housing activity was also weak in December because a new homebuyer tax credit was originally slated to expire in November, and many buyers rushed to complete purchases before the deadline. Congress has extended the credit through April and expanded it.

A separate Commerce report said personal incomes rose more than expected in December and consumer spending increased for the third straight month. But income growth was spurred by a one-time Social Security payment. Wages and salaries rose only 0.1 percent, or $9.1 billion, after increasing 0.4 percent, or $27 billion, in November.

The increases in both income and spending were slim, reflecting the reluctance of many households to spend amid tight credit and high unemployment. Widespread joblessness is also limiting wage and salary growth. Companies are finding it easier to retain workers without raising compensation.

"Consumers continue to save far more than in recent years and allocate their spending very carefully," Julia Coronado, an economist at BNP Paribas, wrote in a note to clients.

Incomes rose 0.4 percent, the sixth increase in a row. Consumer spending, meanwhile, increased by 0.2 percent, less than analysts' forecasts of 0.3 percent. The department also revised November's figure to show a 0.7 percent increase in spending, higher than the initial estimate of 0.5 percent.

Consumer spending is closely watched because it accounts for about 70 percent of total economic activity. Spending has grown in the past six months but consumers remain cautious as they seek to rebuild savings battered by a steep decline in household wealth.

Americans saved 4.8 percent of their incomes in December, the department said, up from 4.5 percent the previous month. That's up sharply from the spring of 2008, when the savings rate fell below 1 percent.

Rising spending helped the economy grow at a rapid pace in last year's fourth quarter, the department said last week. Consumer spending increased by 2 percent in the October to December period, after a 2.8 percent increase in the third quarter.

That helped boost the nation's gross domestic product, the broadest measure of the economy's output, by 5.7 percent in the fourth quarter, the department said. It was the fastest growth in six years. The economy grew at a 2.2 percent rate in the third quarter after a record four straight quarters of decline.

Much of the growth was powered by increased production as companies stabilized their inventory stockpiles. Inventories were cut sharply in the recession as sales slowed. As firms rebuild their inventories, the economy should benefit. But once inventories are in line with sales, that support for the economy will disappear.